Archive for April, 2008

We are not in times of mess. We are in times of unprecedented mess. Not because people have lost lot of money, but because loss is messy, loss of jobs, loss of a house, loss of a client, loss of purchasing parity, loss of belief and confidence. We also lost benchmarks about what market acumen really means. Is it about J P Morgan’s quantitative skills costing taxpayers millions of dollars or about Northern Rock, the smart bank of United Kingdom which went bust? We are just witnessing economics the way Elliott once said, “Laws of economics are as they should be, ruthless”.

And if you think flunking finance will teach us, you are mistaken, the fool’s gold is a mirage which will continue to occur with cyclical precisions, just a few learn, rest perish. Abraham Lincoln said, you can fool some people most of the time, all the people some time, but you cannot fool all the people all the time. Markets will thrive till it can fool all the people some time. Markets have to live you see, so it will keep fooling a few of us all the time. We at Orpheus know that the challenge is to be fooled less, as it’s the human destiny to be fooled sometime, as you can not fool the market anytime.

What Gold is doing now, seems another mirage that could surprise us in the short term, say more than a few months. A few weeks are enough for markets to destroy 80% of wealth. It took three years to destroy 70 years of wealth creation from 1857-1929. But what we are talking here is about Recession. How Gold’s rise is connected to destruction of paper money and everything non tangible, be it stocks or CDO’s and swap options. Gold’s rise and dollar’s fall started taking a universal truth status. And when a thought reaches epic proportions on mass psychology, market twists the axiom. So if Gold is going up because of a crisis, a fall here on Gold should end the same crisis. No?

The Gold-Silver ratio, we highlighted last time (The Metals Maze) gave no signal of a collapse. Rather the sentiment indicator has moved unfazed despite millions going homeless and more than 100,000 losing their financial jobs (more serious than the tech bust). This means two things, one that the Gold-Silver ratio has stopped working after predicting the 1980s and 2000s crash or second the crisis has not yet started. So if the crisis has not started, we might have a respite coming before the real mess starts. We at Orpheus at this stage don’t know what real crisis the indicator is suggesting, but it definitely seems more than just linked to Gold and dollar.

We kept track on Gold, publishing short term updates. However, it’s been exactly a year since we published an exhaustive Elliott counts on GOLD. WAVES.GOLD published on gold on April 21 2007 made a few projections. One of them was that above dollar 690, its 1000. We have juxtaposed the cases from the old report with the new ones before making projections ahead in time. We have also updated the channeling system, which we explained last time when we talked about CHANNEL psychology when we talked about Jesse Livermore.

‘Anticipated’ and ‘Happened’ cases have stopped surprising us and fractal watching is slowly and surely increasing. Somebody asked us at a recent conference on Elliott Waves. What if Elliott and fractal watching becomes popular. Will it stop working? Well on the upfront this gave us some joy, as the question regarding Elliott’s wave performance assumed that it worked. About the other part, whether it will stop working, the answer was simple. We humans are so focused on short termism than long term asset watch, long term investments are left to gurus like WARREN BUFFET. Well Buffet went over 3 decades, but the long termism we are talking about is more than a few months, maybe more than a year. Wars and battles for profits are short term in nature that is why even if the number of Elliotticians increases globally, it’s only the short term counts that may get more chaotic and confusing. On the longer term there are always opportunities few look at.

Coming back to Gold, now that prices have hit the anticipated targets, we are on another alert now. Is it over for the Gold rush for a few weeks, or is Gold ready to fall for a few months, till where? And if it’s indeed over that’s bad time for Recession watchers. Falling Gold prices mean, dollar strengthening and dollar strengthening means new high on DOW. This might confound many and common sense might catch up finally that if US markets are rising why BRAZIL, RUSSIA, INDIA, CHINA and ROMANIA should keep falling.

According to the TIME and PRICE symmetry, it seems Gold has topped and is ready to come down back to dollar 800 levels and potentially lower sub 800. The funny part is that if we indeed are on the smart side, new highs on DOW will have new excitement linked with it, new patriots, new bloggers, new fool’s looking for the new gold.

We are not in times of mess. We are in times of unprecedented mess. Not because people have lost lot of money, but because loss is messy, loss of jobs, loss of a house, loss of a client, loss of purchasing parity, loss of belief and confidence. We also lost benchmarks about what market acumen really means. Is it about J P Morgan’s quantitative skills costing taxpayers millions of dollars or about Northern Rock, the smart bank of United Kingdom which went bust? We are just witnessing economics the way Elliott once said, “Laws of economics are as they should be, ruthless”.

And if you think flunking finance will teach us, you are mistaken, the fool’s gold is a mirage which will continue to occur with cyclical precisions, just a few learn, rest perish. Abraham Lincoln said, you can fool some people most of the time, all the people some time, but you cannot fool all the people all the time. Markets will thrive till it can fool all the people some time. Markets have to live you see, so it will keep fooling a few of us all the time. We at Orpheus know that the challenge is to be fooled less, as it’s the human destiny to be fooled sometime, as you can not fool the market anytime.

Intermarket relationships between metals can not only give cues about the economic cycle but also lead the start of a global equity bear market.

The last time we discussed Gold in Dec 07, it was at dollar 800. Starting 2008 it completed it’s leg up to 1000 and is now ruling at 930. While Gold (Fig 1.) and Silver (Fig 10.) might be hanging in there tight, metals as a group are scattered on the price performance scale.

For example few would like to talk about Zinc, which has crashed 50% since the time we wrote about negativity on Zinc (Jan 2007 – India Outlook). It was then we saw that the metal had turned and Hindustan Zinc (Fig 3.) could fall despite a positive Sensex. The love has turned into hate. And all the merger talks between Zinifex and Umicore could not prevent Zinifex from crashing 61% from merger highs. Euphoria about mergers, despite a 33% success rate (since 1985) is unsustainable.

Even Uranium (Fig 4.) fell 50% from its peak. There are of course many reasons why metals or markets fall or why things happen. But most reasons, like news always are late and cannot time a market. The reasons which worked for Zinc were linked to fractals of mass psychology and intermarket analysis.

We made the case between equity (example Hindustan Zinc) and its underlying metal (Zinc - Fig 2.) and how one could tell us about the other. Today we go a step further and look at the relationships between metals itself. We extend the inter market dynamics to various metals like Gold, Silver, Zinc, Copper and Uranium.

Silver has never outperformed Gold since 1985. And Gold-Silver (Fig 6.) sentiment indicator, which we have mentioned on prior occasions continues to be leading market indicator for equity bear markets.

The last two periods when Gold outperformed Silver was in 1987-1991 and 1999 -2003 (Fig 6.) . Both these periods were the only time we witnessed the last two global bear markets. Gold has not started outperforming silver yet and is still at parity of about 25 years.

So there is no negative signal here. This means that all references to great depression and pictures of pensive Ben Bernanke on the Newsweek cover alluding to a global crisis and failure of American Leadership might all be premature. According to metals, this was no big collapse. We need another few months to see what works, the news and emotional chaos or the Gold - Silver ratio.

Then comes Copper-Silver (Fig 5.) ratio. Copper is outperforming Silver from Jan 2002. Why should Copper outperform Silver? Copper is more about discretionary consumption and Silver is precious and limited in its industrial usage.

This is probably the reason why Copper leads Silver consumption at the start of a business cycle. The ratio made a low few months ahead of the equity bear market low worldwide in 2002.

The ratio has stagnated over the last two years but is still above parity. Copper prices also are in a large consolidation and seem to have a primary (more than 9 months) upside left. This means more outperformance for copper compared to Silver. This too does not give us bearish cue for equity markets now.

Coming to Uranium, this strategic metal has also outperformed Gold. Compared to the geopolitical crisis and the dollar crisis that is crippling the world economy, it’s the energy crisis which Uranium suggests is more serious.

This metal leadership starting Feb 2005 happened exactly at the time when Oil (Fig. 7) broke above the dollar 40 barrier broke. We have also illustrated the Uranium – Oil (Fig 9.) intermarket ratio. The outperformance of Uranium compared to Oil also suggested that Oil was set to rise much above dollar 40. Strange reason some might say, a metal telling us more about global economy than the best economists in the world.

This list of intermarket dynamics between metals can be stretched to Uranium vs. Copper. Copper is linked to mid economic expansion cycle, while Uranium owing to its energy connection comes in the late expansion economic cycle. Uranium started outperforming Copper in (late) 2005 and is still above parity suggesting that we are nearing towards the turn in the economic cycle. Here also we have no signal which tells us, that we have indeed turned.

Zinc has come a full circle compared to Gold (Zinc vs. Gold – Fig 8.) . It outperformed Gold from Sep 2005 and now starting this year started underperforming Gold. Why?

Zinc is linked with auto and auto is in a rut. The commodity drop might be owing to this auto connection. Zinc is also ancillary to the metal industry. A drawdown in metal prices might also have some added influence.

From a fractal perspective, both Gold and Silver are completing their primary fifth circle legs with a final pending leg up. Final leg ups are tricky and can be truncated. So we will not be micro timing it. After these respective final legs, both precious metals should see a sizeable retracement.

Locally (India)INR 12,000 levels are decisive for MCX Gold Jun. A push down here confirms further negativity here. MCX Silver Jun key levels lie at INR 24,000. And we have not much positive confirmation here too.
In conclusion, we are indeed at key junctures for Gold and Silver and global markets. But in any case, it’s not the metals that are insane, but we the humans.

In his book, The power of Gold, Peter Bernstein starts with a story of a man on a voyage with his entire wealth in a large bag of gold coins. A terrible storm and a call to abandon the ship prompted the man to jump overboard strapped to his bag of gold. He promptly sank to the bottom of the sea. And so the narrator asks, “Now, as he was sinking, had he the gold? Or had the gold him?“

A free float index of 30 stocks XTR -30 FREE FLOAT can not be constructed just from BVB stocks. We need to combine the RASDAQ and BVB offering. And since there was no available broad market index, which we could just rehash and present the XTR – 30, we got to work on the XTR – 100, Romanian broad market index. An index basket of top 100 market capitalized and tradable stocks that represented the Romanian market universe. We combined the list of stocks from RASDAQ and BVB and made a composite list of 150 stocks, screened them on basis of market capitalization, economic sectors, economic cycle sectors based on global classification (GICS).
This exercise not only brought out interesting observations about the Rasdaq market, but also that there is a broad investable market existing in Romania as demonstrated by the XTR 100. Just like blue chip indices (XTR 21 and BET), broad indices play a significant role in the market. Internationally we have the MSCI US Broad Market Index, which represents approximately 99.5% of the capitalization of the US equity market. It is the aggregation of the MSCI US Investable Market 2500 and the Micro Cap Indices. The MSCI US Broad Market Index represents a greater proportion of the US equity market cap than the most commonly used broad market indices. Then we have the Russell broad indices which replicate the total market through a limited number of stocks.

Broad indices assist in many ways. First, they allow to rank each company in the investable universe according to its total market capitalization. Second, the ranking based on capitalization helps eliminate non tradable shares. Third, after float adjustments the broad benchmark most accurately reflect the market. Fourth, broad market indices objectively allow the market to determine the index composition according to clear, published rules and not on a subjective vote of a selection committee. Fifth, the respective broad index matches manager’s behavior and include all the securities that investment managers could actually buy.

To answer some questions that may arise now, like how is XTR 100 a broad market based index for Romania? XTR 100 is composed of 48 stocks from BVB and 52 stocks from RASDAQ. All this 100 stocks together cover 85% (excluding ERSTE*) of Romania market universe. This is the reason XTR 100 is the most broad based investible index in the market today.

How does the XTR 100 rank among the other indices available in the market today? The very fact that XTR 100 sectoral composition is similar to that of BVB places it within the existing universe of indices well while retaining its broad based characteristics. XTR 100 is composed of 37% Financials, 34% Energy, 11% Materials, 6% Utilities and 6% Industrials. The other sectors like Pharma, Discretionary and Staples weigh around 1.5% each. From the economic cycle sector point of view, just like the market universe and BETC, XTR 100 has a large part coming from Late Economic cycle at 39% and Early economic cycle at 54%. Middle expansion economic sector (i.e. Industrials etc.) make 6% of the universe.

What are the most interesting aspects of the XTR 100? The most interesting aspect of the index is that unlike popular belief RASDAQ is a more significant part of Romanian investible universe today. XTR 100 has more stocks coming from RASDAQ than from BVB stock list. And this might look strange as BVB is assumed to have the larger capitalized stock list. Another interesting aspect is that though the filters for stock selection were based on market cap and tradability there were a homogeneous representation across both markets viz. BVB and RASDAQ across individual sectors and economic cycle sectors. For example there are 14 Industrials stock from BVB and 14 from RASDAQ which make the list. A similar situation exists for Materials stock 11 come from BVB and 13 from RASDAQ. The similarities extend into Energy sector which has a break of 4 (BVB) and 3 (RASDAQ).

Speaking sectorally, how different is RASDAQ market from BVB? RASDAQ is more homogeneous than BVB composition as most of the sectors like Industrials, Materials, Discretionary, Financials and Staples are represented well. It is the Energy, Pharma and Utility stocks that are underrepresented in RASDAQ. Even from a market capitalization perspective, barring Pharma and Utilities sector all the other six sectors are well represented. Industrials is the largest market capitalized sector. Even from the economic cycle sectors the market is balanced. All the three economic cycle sectors have more the 30 stocks each.

We will be introducing XTR 100 performance along with other indices we track viz. XTR 21, BET, BETC and BETFI. The week that went saw XTR 21 once again outperforming the BETFI. The XTR 21 large and small caps did better than the universe large and small cap. The index was up 2 percent for the week ending 04 April 2008.